Protecting my L/O! - Posted by Michael

Real Estate Investing
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Posted by JohnBoy on February 07, 2001 at 01:21:50:

In this case the trust would own the property. The tenant would become a co-benificiary with occupancy rights. Since they are a c0-beneficiary of the trust, they have a beneficial interest and since they would be the one’s occupying the property, they would be entitled to deduct the interest and property taxes. The trust agreement would allow for the resident co-beneficiary to lease the property from the trust and allow them a “first right of refusal” to buy the property at a preset date that the trust sets as a date for the property to be sold. At that time the property must be sold according to the terms of the trust agreement and upon the sale of the property each beneficiary would recieve their share of the proceeds based on their percentage of beneficial interest owned in the trust. Since the resident beneficiary that is leasing the property from the trust, they have first right of refusal to buy the property themselves if they so choose. Otherwise the property is sold to another buyer and all beneficiaries get their fair share of the proceeds based on their percentage of beneficial interest owned in the trust agreement.

Did I get that right???

2

Protecting my L/O! - Posted by Michael

Posted by Michael on February 06, 2001 at 01:41:33:

This is a two-part question. If I have a seller sign a deed of trust into a escrow to secure performance on his part, does that make me a lien holder on the property?

Secondly, If so, what if the seller tried to sell the property to someone else? I could foreclose making him fight in court. If I foreclosed it would probably cause my T/B’s to lose their option as well their home, what legal responsibility would I have to them since I had to foreclose on the home?
I hope I explained myself well, it is late and I am tired!

Thanks for any advice you can give me or at least explain the process to me if I got it wrong.
Michael

3

Re: Protecting my L/O! - Posted by Bud Branstetter

Posted by Bud Branstetter on February 06, 2001 at 08:05:16:

From Jack’s answer, I’m not sure you did explain your question. I took it you were asking about a performance mortgage similar to what Bill Bronchick advocates. Based on this there is a contradictory word escrow. The Deed of Trust(DOT states) or Mortgage(mortgage states) is recorded. It is not held in escrow for a future closing. It secures the owners performance to give you the deed if you fullfill you option contract. It does make you a lienholder. You could foreclose. The seller could try to sell to someone else but could not do a convention closing and get title insurance because of your recorded DOT. They could still sell but the new owner would have to honor your DOT. If they did not then then you would foreclose to gain title. You already have possession because you have a tenant in the property. In many states like Texas, the foreclosure process is non-judicial. meaning that the trustee of the deed of trust does not have to go to court but simply demands the requirements of the DOT then posts the sale at a certain period before actually conducting the sale(title). In other states there has to be a court proceeding to allow the foreclosure.(In Texas only on home equity loans). If you keep a conversation going with your T/B on what is going on his interest is not in jepoardy.

Of course there is a better way by using a Pactrust. The deed goes to a trustee of a land trust so the former owner can not unilaterally act. Numerous other protections and features like allowing your T/B to become a resident benificiary and write off interest and property taxes on their personal tax return. Don’t you think a tenant would pay more for that ability?

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Re: Protecting my L/O! (It’s a conflict) - Posted by Jack

Posted by Jack on February 06, 2001 at 02:53:17:

Hello Michael,

Sounds like you’ve invented a new technique.

Under a lease option to purchase, you normally buy an option to purchase on a nonrefundable option fee. This happens after you negotiate the sale price of the home with the seller. All aspects are covered in an agreement between you and the seller, including the right to sub-lease and the credit portion of your monthly rent toward your down payment. In essence, the seller has signed a binding contract that’s enforcable provided you exercise the option at the predetermined date. If you fail to exercise the option, or you stop making your rent payments, the seller has recourse to treat you as a common rental tenant and evict you from the premesis.

In part-two of your question, I think that you’ve answered yourself. Because under that type of deal you would not be holding a true L/O. Instead, you would be asserting yourself as a lien holder, when in fact your
agreement is to acquire the property under the lease option method. The two do not go together.

If you properly executed the L/O agreement, and you faithfully upheld your end of the bargain, the seller could not legally sell the property to someone else. He or she would be liable for court action on your part. That’s the purpose of the L/O agreement — to equally protect both parties involved.

If you defaulted, and you had T/B’s on an option, their claim would be against you, since you would be at fault. However, if the seller defaulted, you would take legal action to protect your interest, which would in turn protect your T/B. If you and the seller correctly entered the contract making it binding on both parties, the court would uphold the contractual agreement.

That’s my take on this situation. But from what I read, I don’t see your deal structure as being an L/O.

Good luck on your deal nonetheless. —Jack

5

How could I do that? - Posted by Michael Hiter

Posted by Michael Hiter on February 06, 2001 at 11:27:07:

Bud,

How could I allow my T/B’s to write off the interest and property taxes they paid, I’m sure the owners of the property would be writing them off every year for theirselve? Also, that would give the tenants more equitable interest in the property, and I always heard that was a bad thing?

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(Correction, on Lien holder status) - Posted by Jack

Posted by Jack on February 06, 2001 at 03:06:15:

You’re right, it’s late, and I made a BooBoo.

You WOULD NOT BE A LIEN HOLDER even under your idea of structuring that deal. A Deed of Trust is a loan instrument used in some states (like Texas for example :slight_smile: in lieu of a mortgage. So friend, you would be a mortgagor, not a mortgagee. So you would have NO recourse as a lien holder, simply because you would NOT BE a lien holder. That position is reserved for those that finance properties.

I’m sorry I did not catch that oversight in the other post. —Jack